Tuesday Morning's (TUES) CEO Michael Rouleau on Q4 2014 Results - Earnings Call Transcript

Aug.21.14 | About: Tuesday Morning (TUES)

Tuesday Morning Corporation (NASDAQ:TUES)

Q4 2014 Earnings Conference Call

August 21, 2014 4:30 PM ET

Executives

Jonathan Morgan – Perry Street Communications

R. Michael Rouleau – Chief Executive Officer

Jeffrey N. Boyer – Executive Vice President, Chief Administrative Officer and Chief Financial Officer

Analysts

Seth Sigman – Credit Suisse Securities

Aram Rubinson – Wolfe Research, LLC

Mark Montagna – Avondale Partners, LLC

David Mann – Johnson Rice & Company LLC

Operator

Good day, ladies and gentlemen, and welcome to the Tuesday Morning Fourth Quarter 2014 Results Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. As a reminder, this conference call may be recorded.

I would now like to introduce your host for today’s conference, Jonathan Morgan. Please go ahead.

Jonathan Morgan

Thank you, Vince, and good afternoon, everyone. I’d like to welcome you all to the Tuesday Morning Corporation’s fiscal fourth quarter and fiscal 2014 earnings conference call. On today’s call are Michael Rouleau, Chief Executive Officer; and Jeff Boyer, Executive Vice President, Chief Administrative Officer and Chief Financial Officer.

If you’ve not yet received a copy of today’s earnings release, you may obtain one by visiting the Investor Relations section of the Tuesday Morning website at www.tuesdaymorning.com. Before we begin today’s discussion, I would like to make you all aware that some of the information presented today may contain forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from those implied in the forward-looking statements.

Information regarding the company’s risk factors was included in our press release and is included in the company’s filings with the SEC. Reconciliation information related to non-GAAP financial measures discussed on this call may be found in the company’s fourth quarter earnings release and on the company’s website under Investor Information.

We'll start today’s call with a few opening comments from Michael Rouleau, and Jeff Boyer will give the financial review of the quarter. Michael, will then follow-up with the company's progress in the fourth quarter and fiscal year and some thoughts about the upcoming year. At the close, we’ll open up the call for your questions. Michael?

R. Michael Rouleau

Thank you, Jon. Good afternoon everyone, and thanks for joining us on our call today. Before Jeff provides the financial review, on our last several calls, I told you that there are three key measures that I believe tell a story of our continued progress. They are our quarterly comp store sales results, our inventory turnover and current condition of our inventory, and our overall financial condition.

First, our comp store sales for the quarter were up 7.4%. If you exclude the non-core categories we exited, and I think this is very important to note, our going forward core categories drove a comp sales increase of 12.9%. Second, our inventory turnover continues to improve on a trailing five-quarter basis. Our turnover has climbed to 2.6 times versus 2.2 times last year at this time, an 18% improvement with inventory levels relatively flat.

At the end of June, inventory was much fresher and more current than at the end of June last year, and the average age of our store inventory has declined to under four months from about 5.7 months last year at this time. And third, our cash position at the end of Q4 was $50 million versus $29 million at the same time last year with no debt and no use of our revolver during the quarter.

As we told you on our last call, we expected to go through a few lumps and bumps this quarter and we took the steps necessary as we took the steps necessary to complete our turnaround and position ourselves for the upcoming year, and as predicted, we had a few of those bumps but really nothing significant. It took a few additional markdowns to exit the remaining clearance as we wanted to structurally reduce our clearance levels from over 10% of current inventory last year to about half that level this year, which we did. Overall, I’m very pleased with our progress. We’re treating out merchandised categories, improving our inventory quality, and on the initial rebilling work that we have done throughout the company we have made consistent and steady progress on our transformation, and we did not miss a beat in the execution of the plan that we have been communicating to you over the last year.

I’ll be back in a few minutes to provide more specifics on this quarter’s accomplishments and some thoughts about fiscal 2015. Now, let me turn the call over to Jeff.

Jeffrey N. Boyer

Thanks, Michael and good afternoon everybody. Earlier today, the company reported net sales of $212.6 million for the fourth quarter of fiscal 2014, a 5.2% increase versus the same period last year. Year-to-date, net sales totaled $864.8 million, an increase of 3.2% from $838.3 million reported last year.

Comparable store sales for the fourth quarter increased 7.4%, comprised of an increase in customer transactions of 9.8% offset by a decrease in average ticket of 2.1%. Comparable store sales for fiscal 2014 increased 6.1% comprised of an increase of customer transactions of 9.5% offset by a decrease in average ticket of 3.1%.

As part of the company's turnaround strategy, last year we determined that certain categories were non-core such as women's sportswear, intimate apparel, and footwear and decided to significantly downsize or exit those businesses. As Michael mentioned, our total comparable store sales was affected by these category exits. It's important to emphasize that our ongoing core categories performed very well and were up approximately 12.9% on a comparable store basis in the quarter. For the year, our ongoing core categories increased 12.3% on a comp store basis.

The company reported a net loss for the fourth quarter of $7.4 million or $0.17 per share and a net loss of $10.2 million or $0.24 per share for the 12 months ended June 30, 2014. This compares favorably to a net loss of $15.6 million or $0.37 per share in the forth quarter of last year, and a net loss of $56.4 million or $1.33 per share for the 12 months ended June 30, 2013. Gross margin for the fourth quarter of fiscal 2014 was 33.5% compared to last year’s gross margin rate of 33.0%. For fiscal 2014, gross margin was 34.9% compared to 30.9% in fiscal 2013.

Fourth quarter SG&A expense has decreased slightly to $77.5 million compared to $78.1 million for the fourth quarter last year. As a percent of net sales, SG&A was 36.5% versus 38.6% in the same period last year. Our operating loss for the fourth quarter of fiscal 2014 was $6.2 million compared to an operating loss of $11.3 million in the fourth quarter of fiscal 2013. Our operating loss for fiscal 2014 was $8.1 million versus an operating loss of $56.5 million in fiscal 2013.

Beginning in fiscal 2013 and throughout fiscal 2014, as a part of the company’s strategic turnaround program, we’ve incurred a number of charges or credits not representative of our ongoing margin performance or expense structure. These unusual items relate to severance and legal expenses for senior management changes as well as for executive recruiting costs and company policy changes. Incremental inventory markdowns were incurred that related to our program to improve our inventory assortment and overall inventory quality.

In addition, as part of our turnaround, certain assets and fixtures are no longer being utilized and we’re return off. We believe that the presentation of non-GAAP financial measures excluding these unusual items can provide a more relevant and accurate picture of our current performance and maybe a better indication of our future performance. In today’s press release, we’ve included tables that reconcile GAAP to non-GAAP operating income and loss, net income and net loss, and net income and net loss per share for the fourth quarter of fiscal years 2014 and 2013 and for the 12 months ended June 30, 2014 and June 30, 2013.

We’ve also provided supplemental schedules in the press release that provide a walk across from our GAAP to non-GAAP P&Ls for current and prior year periods for both our fourth quarter and fiscal year. Additional details concerning these charges are also included in our 10-K.

The company’s fiscal 2014 fourth quarter results include $3.9 million in net pretax expenses or turnaround related SG&A expenses, inventory items, and asset disposals as well as a vacation policy change, and $7.5 million for similar turnaround related items recorded in the fourth quarter of fiscal 2013.

Excluding these unusual items, the company’s gross margin in Q4 was 35.2% for fiscal 2014 versus 34.0% for Q4 of last year. The 120 basis point year-over-year gross margin improvement was driven by lower markdowns, improved shrink results in distribution efficiencies partly offset by lower IMU. Again, adjusting for unusual items, SG&A was 36.6% of sales in Q4 of this year compared to 37.9% in the same period last year.

The 130 basis point improvement in SG&A leverage was driven by the combination of solid cost management and strong sales growth. Excluding unusual items, our adjusted operating loss on a non-GAAP basis decreased from $7.8 million in the prior year fourth quarter to an adjusted operational loss of $3.1 million for the fourth quarter ended June 30, 2014.

For fiscal 2014, the company’s results include a net $10.5 million in pre-tax expenses for turnaround related SG&A expenses, the inventory items and asset disposals as well as the vacation policy change. In fiscal 2013, the company’s results included $62.2 million for similar turnaround related items. Excluding these unusual items, the company’s gross margin for fiscal 2014 plus 35.5% versus 36.2% for fiscal 2013.

The 70 basis point year-over-year decrease in gross margin was driven by lower IMU currently offset by distribution efficiencies and improved shrink results. Adjusting for unusual items in both years, SG&A was 35.3% of sales for fiscal 2014, compared to 36.1% in the same period last year.

The 80 basis point improvement in SG&A leverage was driven by the companies by holding the company’s adjusted SG&A expense increase to 1% all supporting total sales growth of 3%. Excluding unusual items, our adjusted operating income on a non-GAAP basis increased by $500,000 for fiscal 2013 to $1.8 million for fiscal 2014.

Moving to the balance sheet, we ended the quarter with inventory down $4.3 million or 2% to $207.7 million from $212 million a year ago. On a per store basis, inventory was essentially flat with the same period last year. Note that our inventory on a unit basis is 9% below last year. But our inventory has a higher value per unit. Our inventory turnover for the trailing five quarters is 2.6 turns and compares favorably to our prior year trailing five quarter turnover of 2.2 turns.

As Michael mentioned, the quality of our inventory has improved considerably and the average age of our current store level inventory is now below four months. We continue to benefit from our strong balance sheet. Cash and cash equivalents were $49.7 million at June 30, 2014, with no cash borrowings outstanding under the line of credit and availability on net line of credit of $98.7 million compared to a cash and cash equivalent position of $28.9 million at the end of the fourth quarter of last year.

During the fourth quarter, we invested $2.7 million in capital expenditures, primarily for distribution center and store improvements. During the fourth quarter of fiscal 2014, we opened three new stores, closed four and relocated five ending with a store count of 810. During fiscal year 2014, we have opened nine stores, closed 27 and relocated 13 stores. We continue to be very pleased with our new and relocated store performance.

Our new stores are exceeding their pro forma plans and our 13 stores relocated during fiscal 2014 continue to deliver a 40% to 50% sales increase versus the same period last year.

Now, I will turn the call back over to Michael. Michael?

R. Michael Rouleau

Thank you, Jeff. On our last call, I spent a few minutes describing the three phases of the turnaround plan that we put in place above a year ago. And I want to just briefly remind you of these three phases. Phase I which started last summer, is when we started the cleanup of the very poor condition of our stores and warehouses and the exit of the apparel business in our stores, while at the same time establishing an initial company in merchandise direction. Then Phase II we started few months later on October as where we quickly changed focus and spent our efforts preparing for Christmas. Where we did our very best and a very, very short period of time. And we delivered some pretty solid results, Phase III which we are finishing up just now is what we call the final phase of the turnaround, which we said on prior calls.

We expected to complete by September 1st and while everything may not be perfect. We are basically done. Last four to five months leading up to the September 1st were spent on making the final conversion from the old to new selling off the remaining discontinued merchandise, cleaning up a few lumps and bringing in the replacement merchandise and making some modifications to our store layouts. So that all 800 plus stores look similar. And now that with all complete we’re finally looking forward getting ready for the exciting fall and Christmas selling season. We’re now in a position to focus on improving our financial performance both in sales and profits. And now I want to make a few brief comments about the areas that will drive our future results merchandising, marketing stores, supply chain and real estate.

Merchandising the all of the most success of the company will be determined by the merchandise we purchased. Earlier this year, we changed our merchandised strategy from narrow and deep to wide and shallow meaning we’re buying a broader assortment of merchandise but at much shallower purchase level per item this change has the affect of making our stores merchandise offerings more interesting and fresh and additionally reducing our future markdowns which really hurt us in the past. This change has made a very positive difference and the customer reaction to our stores.

We’re also making a lot of new relationships with better quality suppliers and we are finding there is a lot of merchandise available to us. Many vendors have been in our stores they hear the industry buzz and many of those are that are on the other side are now very interested in doing business with us. Our recent expansion categories of pets, home décor, [indiscernible], crafts and furniture are really showing some very, very strong sales increases. I want to talk about marketing.

As I mentioned on the last several calls we transition to a smaller more impactful more paid circular with good results. In the past we were sort on operational execution. But by paying more attention to the detail we’re now getting more out of less our new Senior VP of Marketing Susan Davidson is examining all the component parts of our marketing areas historically we have utilized fairly traditional marketing program such as Sunday circulars and direct mail. And we’ve done this without the benefit a much consumer research Susan is diving in better understand our customer base and to determine how to most effectively use our marketing dollars.

We expect that rebuilding our marketing program from the bottom up we’ll take a little time but we should be able to share our updated marketing efforts with you on our next call. I want to talk about our stores. Our stores are looking pretty good they have all been relayed cleaned up from the merchandising in the stores as much more impactful all the 100 plus stores for the very first time have a similar appearance with merchandise adjacencies end cap displays and merchandise presentation. Our supply chain, we are now in the process of putting together a long range supply chain plan, which we would expect would include regional distribution facilities supported with upgraded systems.

Our first step in improving our store services was the implement pull point capabilities which effectively our regional cross dock operations. Two main objectives for these pull points or to first increase our service to our stores was better on time deliveries. Second to give us more space capacity within our current distribution center. We currently have four pull points and operation across the country and expect to have another four or five by the end of the fiscal year.

These provide a great service to the stores and they also provide some freight savings. In addition there are lot of learning’s here, that will help us with running a regional DC network in the future as always we will keep you updated as we make progress on this important initiative.

Real estate, we’re making a lot of progress on finding the good A and B location to replace to the C, D, E and even F locations of the past. We expect to open 10 to 15 new stores and complete 30 relocations this fiscal year. As Jeff said, we’re very, very pleased with both our new and our relocated store sales results. We realized that our biggest opportunity is both maximizing the potential and the stores we currently have and ongoing relocations.

However, we won’t let our real estate activities get ahead of our ability to open a good store, we will carefully balance these two efforts as we need a little bit more time to get the operational side right. We don’t want to get ahead of ourselves and then have to come back and spend the enormous amount of time redoing our efforts later.

So now what do we want you to take away from this call. Well, understanding that we have made remarkable progress in a very, very short-period of time and we are now on our way. We have just completed a very complex turnaround effort while at the same time showing good sales performance reducing our inventory and increasing our cash position as of September 1 while there maybe a few minor bumps out there, we are finally looking forward we are at the starting gate.

Second, our management is very, very strong. We strengthened our senior management team again in June with a Senior VP of Marketing Susan Davidson, this team knows the drill. Third we expect fiscal 2015 sales to be strong especially the important fall and Christmas periods. We have worked on all the merchandising operational details. We believe we are ready and lastly we are expecting to return to profitability this year.

In summary, there is an abundant of opportunity here at Tuesday Morning and unlike other retailers, we have so many opportunities to pick from and so many gaps to fill we have to be careful to prioritize what we work on first. It was a very focused plan with discipline, execution, that got us so quickly to where we are today and we will use the same approach as we continue to rebuild the company.

Lastly, I want to repeat once again we are building this company to last. Not looking for short-term home runs just lots of singles over many years. I invite all of you to go visit our stores in September I think this is where our efforts can be confirmed. And if you do, I want to tell you what you should expect.

First I look at pretty good, all looking similar, expand and merchandising categories in place, replacing the exited apparel business. Last the new fresh merchandise arriving weekly, great looking new and relocated stores increased traffic in our stores with very satisfied customers, great morale with our associates. All, 800 and plus store managers explaining our direction exactly the same way in all of this positioning us for future improvements and our financial results.

Thanks for joining us today, we will now take questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question comes from Seth Sigman of Credit Suisse. Your line is open.

Seth Sigman – Credit Suisse Securities

Okay, thanks and congrats guys on the progress that you’re seeing. I just want to ask a couple of questions on gross margin and just how to think about that. I guess first is, this quarter what was the impact from the clearance work that you guys were doing. Margins were up 120 basis points on an adjusted basis, what would that have been excluding clearance?

R. Michael Rouleau

Well, the clearance, the large amount of clearance that we took Seth we did adjust for. So, if you take a look at that walk across schedule that we had, we did make an adjustment to back that out. So, that improvement that you’re seeing of a 120 basis points on adjusted basis removes that extra clearance that we took.

Seth Sigman – Credit Suisse Securities

Gotcha, okay. And just in general, how do you think about margins in 2015 especially in light of some of the operational supply chain work that you guys are doing?

R. Michael Rouleau

We’re looking for further expansion in gross margin. We think we had nice stable point right now in fiscal 2014 at 35.5%, actually probably over performed a little bit, our internal forecast is to be in the low 35%, so 35.2%, 35.3%, so we did a little bit better on that, but we do expect to drive another 50 basis points, 60 basis points of margin improvement next year getting north of 36% as we get into the year from a margin standpoint. Most of that’s going to come from markdown improvement. We’ve gotten a lot better in managing our buys and the size of our buys. We’re getting a lot better in how we buy our promotional products around Green Cards. And so we’ve been much more aggressive in managing through inventory, and that will add a good portion of it.

In addition to that, we’re seeing some benefits from the distribution side just in terms of efficiencies as well. So those are the things together are the primary drivers in fiscal 2015, it should be accretive to us from a gross margin standpoint.

Seth Sigman – Credit Suisse Securities

Okay, that’s very helpful. Just a shift gears to comps, I mean do you feel like the high-single digit or even low-double-digit comps that you’re seeing in, I guess your core business excluding the exited categories, that’s sustainable growth rate just given all the work that you’re doing in the store right now?

Jeffrey N. Boyer

I would say yes, Seth. We feel very good about the merchandising changes we’ve made. We feel very good about the progress we’ve made in all of those things. A lot of times, people will take a look and say, well do you think you’ll be able to drive it, once the drag is gone, we will be driving a 12% comp. Well, that’s probably a bit too high, yet I don’t think 7% is quite high enough. So, it’s probably somewhere in between the two as you cycle around and get through this comparison issue that we have.

R. Michael Rouleau

I agree with that.

Seth Sigman – Credit Suisse Securities

Okay. Just to dissect that a little bit further, to-date a lot of the recovery has come from the transaction side of the comp equation, which has been very encouraging, but maybe just discuss the prospects for the ticket side as a potential driver in 2015, as you kind of get through that markdown headwind that you talked about before. And then I guess you also reset pricing a bit this past year?

R. Michael Rouleau

There are probably two pieces that impacted our overall average ticket, Seth, and you hit both of them. One was we made those strategic pricing decisions back 18 months ago or so and really reset some pricing. That was probably the biggest piece.

In addition, throughout most of 2014, we’re moving through a fair amount of clearance. We had the large clearance adjustment that we had moving through that both. Both of those degraded somewhat the value of our inventory on it. And we should be cycling through that, which should start to happen is we should have less of a drag from the average ticket and more of the transaction benefit will flow through.

Seth Sigman – Credit Suisse Securities

Okay, great. Good luck.

R. Michael Rouleau

Thanks, Seth.

Operator

Thank you. And our next question comes from Aram Rubinson of Wolfe Research. Your line is open.

Aram Rubinson – Wolfe Research, LLC

Couple of things, can you just add a little color on the merchandising side, maybe if Melissa’s there on what kind of brands and relationships you guys are striking out that you haven’t had before to give us just a little flavor of what to expect?

R. Michael Rouleau

Melissa isn’t here, but I’m here and I’m involved in that – we just don’t want to comment on that now. You will have to go see at the stores, I think we are making some good headway in certain areas, but I think we just don’t want to talk about it.

Aram Rubinson – Wolfe Research, LLC

Okay. Couple other things there Michael. Can you talk about the range of the comps, because I know there are some stores that are still out slogging it out with the Walgreens that’s moved across the street or something else like that. So those – these might be turning to (inaudible)over time that needn’t to be relocated. Can you talk about the band of comps between your best and your worst, and how that kind of fared in Q4 versus prior quarters?

R. Michael Rouleau

I don’t know, whether I want to say that, and Jeff can handle that, but what I would say is that we certainly have had stores that have minus or decreases in their sales. On the other hand, every store is looking better today, and I’ll give you a perfect example of a market. A market that I know of I think had 11 or 12 stores, and on a year-to-date basis, several months ago, they were, I think 9 out of a 11 or whatever were minus and all 11 are now plus. So, we’re gaining– I really would expect unless the site is absolutely horrible, I would expect to see progress in just about every location we have.

Jeffrey N. Boyer

Aram, I don’t have the kind of a decile analysis to go through, but I can tell you that as Michael said, largely we are saying that the rising tide is lifting most of the boats on it, and we’re seeing that across-the-board whether it would be a market base or as we take a look at our store performance most stores are showing increases. We have 800 stores variability, we have some stores that are not performing well. When we take a look at that, the consideration is merchandize content is management of it, is it a real estate issue because it’s in a center that’s not performing well and that we have an opportunity to move that store and we will take the opportunity and relocate it. So, we do have underperforming stores, but we have witnessed across the store base largely speaking that all stores are performing better in fiscal 2014.

Aram Rubinson – Wolfe Research, LLC

Last one, on the reload it sounds like is more of an operational constraint rather than a site, I know you guys are trying to build up the pipeline. Can you give us a sense just whether or not that pipeline is robust and how many kind of – do you have in the pipeline that if you have the operational capabilities, which would be able to do this year and last?

R. Michael Rouleau

I would just – Jeff can talk about the numbers, but we just to want to get ahead of ourselves there. So, could we go out and do 50 or 100 next year whatever it is that would be foolish and that would be going for the brass ring and we are not really interested in doing that because operationally, we probably fall on our face and then have to come back and change the dirty diaper. So we just aren’t interested in doing that these numbers that we provided you here about what we feel comfortable with. We still have a – the opportunity really is still with the rest of the chain, which is over 800 stores. So, we’re going to focus on that and keep moving head with relocations as we go.

Jeffrey N. Boyer

Aram, I tell you that from a pipeline standpoint, the pipeline is building nicely, we feel very comfortable with the 30 relocations this year, which is great. We are looking at acceleration of that in 2016, I can’t tell you quite yet what that acceleration would be, it will be 40 or 50, but we’re looking accelerating that into 2016 on it. I will also tell you though that what we are doing as we aren’t very focused on quality on this. The issue that the company got into in the past was being a little bit shortsighted and still side investments and that sort the company in a long-term. And we’re feeling very good about the quality were getting as we go through our relocation program.

We will let you know that we are actually, our performance and relocating stores is improving. So, the 40% to 50% that we witnessed and over this past year, as we got into the back half of the year and Doug Sullivan came in February and he is applied his knowledge and his approach there. We’re seeing those relocations now do much better. So, the quality the A quality, the B quality the type of – we’re going into the decision process for going through. So, we’re being as Michael said a bit of it is being selective from a real estate standpoint, but also operationally see those stores appropriately, we actually had situation in some of our stores that they were running so well and doing so well that we are running our inventory. So, this is some of the operational stuff just to make sure that we have the inventory to feed the successful store. So that’s were trying to balance Aram as we go forward.

Aram Rubinson –Wolfe Research, LLC

Well, thank you for your hard work and for taking my questions.

Jeffrey N. Boyer

Thanks, Aram.

Operator

Thank you. And our next question comes from Mark Montagna of Avondale Partners. Your line is open.

Mark Montagna – Avondale Partners, LLC

Hi, thank you. Just looking at the relo stores, have any of them come into their second year and if so how many and how are those coming?

R. Michael Rouleau

Yes, we’ve just cycled a few of those are really some in 2012 and 2013 and we had some read in 2014. And they are basically mimicking the chain. So, if the chain is doing high single-digit comps those sorts also appear to be doing high single-digit comps. So, they get a nice bump in that initial year, but as we ramp on the second year, they seem to settle down into kind of what the company comp store sales were doing. So, we’re encouraged by that that is not a one, they wonder that they fall back again. We do have to measure those after the first two or three months, we get a really nice lift in the first 60 days, 90 days. So, we take a look after 15 months and see how those stores doing after 15 months, because it takes that very early period out of it. But they’re doing well they’re doing get a system with a chain.

Mark Montagna – Avondale Partners, LLC

Okay and then when you look at gross margin you mentioned 50 to 60 basis points and when you consider driving such strong comps is it fair to assume that SG&A would be up well over 100, 120 basis improved by say a 100, 120 basis points.

R. Michael Rouleau

Yes, I think in the past we’ve told you that our thought was initially we might be more balanced at least in this near-term between gross margin SG&A leverage and we get a couple of 100 basis points between the two this particular year and 2015 where we did well in gross margin and 2014 the basis is little bit higher so it’s a little bit more weighted to SG&A so you are absolutely right the way I describe it in simple terms Mark is that of our overall growth probably one-third of the margin, operating margin improvement comes from gross margin and two-thirds will come from SG&A leverage on it. And it is 100 basis points or more than we expect next year.

Mark Montagna – Avondale Partners, LLC

Okay and then just a quick follow-up is your goal to keep clearance that 5% of sales from here on out and then I assume you’re probably expecting average ticket to per average basket to increase next year?

R. Michael Rouleau

I would say both, but I would say is the 5% to 6% range is no reason why that I know today that we can’t see in the range so that should be the mark.

Mark Montagna – Avondale Partners, LLC

Okay and then what about average of basket I assume that would be up because you should be anniversarying the lower IMU.

R. Michael Rouleau

I think we’re going to be better merchants this time go on I think people going to our store the gentlemen that we have sitting right next to us here that introduce the call went into one of our stores today all excited and spent $45. And so he just a customer but so as our offerings get better and our store gets more exciting people will be buying more.

Mark Montagna – Avondale Partners, LLC

Okay, perfect thank you.

R. Michael Rouleau

Thanks, Mark.

Operator

Thank you. And our next question comes from David Mann of Johnson Rice. Your line is open.

David Mann – Johnson Rice & Company LLC

Yes, thank you nice job and great Michael, stores looks great. First question when you talk about the core categories and their performance. Can you just clarify what percentage of the mix you are talking about now in this quarter and also I’d be curious about the newer categories how will are newer and expanded categories how will they are performing?

R. Michael Rouleau

I can tell you maybe the easier way to say and think about it, is that over the past two years with all of the products that we exited. We’ve exited probably between $50 million and $60 million of sales and against a prior year base of 825, 830 on that it’s a pretty sizable chunk it’s mid single-digits 6%, 7% of our store base that has really gone away. So not quite 10% in total about probably 7% to 8% of our – I should say store base of our merchandised categories that have gone away. So it gives you some sense as what’s gone to zero over that time period.

It’s probably tougher to give you what I’m on our filling categories are, they tend to be some of our smaller categories to start with there are showing great growth as I get more space on it. What’s important as well though as some of our more traditional categories textiles, home decor all of those have also gotten some more space. But I’ll tell you besides space they’ve gotten better merchandising, better presentation those are showing double-digit growth. So it’s good to have smaller categories like pets and crafts and some of the bath shops they’ve gotten into do well. But it’s really encouraging is that the core categories which is our big hitters are also doing very, very well. Michael do you want to…

R. Michael Rouleau

I think this, when we made this decision and we made it quick we put a pencil to the categories that we’re going to expand and we took put a pencil to what we’re going to lead down and what we expanded the numbers were more than what we deleted. So we were pretty sure of going in that we were more than covering the loss business. And then we did factor that out. So I just think that’s worth knowing that.

David Mann – Johnson Rice & Company LLC

Very good. And then in terms of the real estate new stores you talked about opening 10 next year will that be the net number, I think you had indicated on the last call you might have net reduction in overall stores in 2015.

R. Michael Rouleau

Yes, that number I think that numbers will open 10 to 15 new next year. We’ll do 30 relocations don’t change the store count number. On the closure side we’re still seeing a number of more closures than we like to have that number ranges between 30 to 35 maybe as many as 40 closures that we have next year. So there is a potential that will have some contraction in the store base overall. The good news is as I mentioned before the quality of the stores we’re getting both the relocations and the new, both good quality also what’s happening is we’re getting larger size stores.

We’re getting out of the 5,000, 6,000, 7,000, 8,000 square foot stores we’re going into 12,000 to 15,000 square-foot stores. Net-net, the square footage that we’re going to have next year, the total square footage for the stores is going to be pretty comparable. I think we finished this year with about 8.6 million square feet, we’re going to be pretty done close to that next year. Even with some contraction in the store base. And again we feel good about that because we’re getting some good sales productivity and that square footage now.

David Mann – Johnson Rice & Company LLC

In terms of SG&A growth, do you – I think you’ve talked in the past about a growing, at about half the rate of sales is that still the expectation or is there any other investment you want to make in the stores?

Jeffrey N. Boyer

There’s probably a little bit of snapback investment in fiscal 2015, they’re general rule is about half the rate of sales were probably at about 50% this year. So, our top line reported sales growth call it 6% or 7% will probably doing 3.5% to 4% on the SG&A. Part of it is we put in the broader compensation program for store managers. We have stock compensation. I’ll tell you even though we had a good year this year. We didn’t payout target bonus. We had a below target on the bonus here. So, we have a snapback and kind of the bonus going back. So, number of elements actually will drive a little of our cost up a little bit higher than our rule of 50%, but that number on David for your planning purposes and that morality is just probably closer to 50%.

David Mann – Johnson Rice & Company LLC

Okay. One last question, so in June, at the end of the quarter you’re coming in relatively lean as you work plans in your inventory, I’m curious as you’ve been building inventories into the end of the quarter and into this quarter. Can you talk a little bit about I know you don’t comment inter quarter about sales, but a little bit about trend it would seem like with some of the new merchandise and the building inventory quality that sales should be pretty good.

Jeffrey N. Boyer

We’re very pleased with sales right now. But Michael you want to add any color.

R. Michael Rouleau

We’re very pleased with sales right now.

David Mann – Johnson Rice & Company LLC

All right, thank you very much.

R. Michael Rouleau

Thanks, David.

Operator

Thank you. And we have a follow-up from Mr. Mark Montagna. Sir, your line is open.

Mark Montagna – Avondale Partners

Hi, with Melissa’s hiring that mean she comes from a really impressive background at the home decorators design or whatever it’s called. How does help us understand how that opens up the vendor relationships meaning is she bringing increasing your relationships by 50% or some incredible magnitude?

R. Michael Rouleau

She has a vendor that long. So I would just say this, she maybe on the call listening to this, but Melissa is a very positive personality and she just listen too, she’s very implacable, she’s got lot of trends and she knows up in New York and then the markets we do business well shaped and she use to be a – of a domestic buyer I believe that Walmart and she knows how to tell the story. And she’s not afraid to go right to the top of this company, she’s bold and we got a good story to tell. So, she’s getting a lot of attention that we really didn’t go out pursued in the past. So, I see a lot of good things happening as a result are being here.

Mark Montagna – Avondale Partners

Okay.

Jeffrey N. Boyer

I would just add to that space, Melissa’s skill set which is great for us. We’re also witnessing a lot of and as Michael said in vendors. But there’s also lot of product out there as well. So we’re seeing a lot of product availability we just import.

Mark Montagna – Avondale Partners

Okay, thank you.

Operator

Thank you. And at this time I’d like to turn the call back over to Mr. Rouleau.

R. Michael Rouleau

Okay, it sounds like we finished with the questions and this is Jeff. We will finish off the call here and I appreciate everybody dialing in and look forward to updating you in about another 90 days as we report the first quarter. Thanks everybody for joining us.

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